Was Stifel wrong in upgrading Starbucks?

Starbucks Corporation (NASDAQ: SBUX) saw its stock gain 5% on Tuesday after Stifel analyst Chris O’Cull acknowledged the coffee chain is among the most impacted restaurants, but the stock should still be bought by investors.

The upgrade

According to O’Cull, Starbucks’ morning business is still hurting as the regular flow of customers stopping for a coffee on their way to work is still severely disrupted from the COVID-19 pandemic. Travel and tourism are also ground to a halt with no immediate signs of a return.

But management is doing an excellent job in acknowledging its challenges and pivoting the business where it can to offset as much of the losses as possible, according to the analyst. Most notably, the company is working quickly to improve throughput at stores. Dedicated pick-up only or curbside pickup-only stores will prove to be more relevant as consumers continue to demand lower-risk options.

So was the right call? CNBC “Halftime Report” regulars debate the analyst’s move.

China play

Starbucks is a good way for investors to bet on an economic recovery in the Chinese market, Michael Farr of Farr, Miller & Washington said. The country is in the early stages of showing improving economic metrics and there is reason to believe the Asian country is growing at a faster pace than the U.S. 

Starbucks is also operating in a more relaxed competitive environment after the embarrassing Luckin Coffee fiasco.

Meanwhile, Starbucks is showing 14% to 15% annual earnings growth and offers a 2.1% dividend yield, he said. This may offset the fact that the stock is trading at 27 times next year’s earnings which isn’t cheap.

“With that sort of earnings growth, I like that call,” he concluded. “It’s still on the way up.”

$100 stock next year

Josh Brown of Ritholtz Wealth Management said he has been buying Starbucks’ stock since it was trading in the $60s and he believes it will trade north of $100 per share in 2021. The coffee chain will solidify its reputation as “one of the better” stocks to own once a vaccine is introduced because of its large exposure to business travel.

By contrast, other restaurants fared just fine in the COVID environment and embraced delivery options to offset foot traffic declines.

In the near-term, Starbucks should benefit from seasonal drinks, especially fan-favorites like pumpkin-spiced beverages. This should give Starbucks a near-term lift and help offset some of its lost breakfast and daypart traffic.

Finally, from a technical perspective, Starbucks’ chart shows no near-term resistance levels. This gives it at least a near-term path to trade to $90 per share.